Dividends and the Resolution of Uncertainty

Keane, Simon M.

doi:10.1111/j.1468-5957.1974.tb00870.x

Cited by 6 publications

(3 citation statements)

References 2 publications

(1 reference statement)

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“…In such an environment, investors may make many investment decisions based on imperfect or incomplete information. For the investor, the cash dividend is a free and universally available piece of data, and in this context, Keane (1974, 1985) notes that investors have cause to regard the payment of a dividend as a powerful signal about the future performance of the firm. The suggestion is that the dividend provides a reliable signal to investors about underlying company performance, financial strength and earnings growth (Bhattacharya, 1979; Miller and Rock, 1985; Arnott and Asness, 2003; ap Gwilym et al , 2006).…”

Section: Resultsmentioning

confidence: 99%

Evidence on Irish financial directors' views about dividends

McCluskey

Burton²,

Power³

2007

Qualitative Research in Accounting &Amp; Management

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PurposeThis study aims to provide a modern perspective on the role of dividends in smaller developed countries such as Ireland by examining views regarding the determinants of payout levels, the role of taxation and the relevance of conventional signalling theory.Design/methodology/approachThe study employs semi‐structured interviews with the financial directors of 20 leading Irish companies.FindingsThe results suggest support for the notion that dividend policy affects share valuations. However, views regarding this issue – and the role of taxation and signalling theory – vary markedly between quoted and unquoted firms as well as depending on firms' dividend histories.Research limitations/implicationsThe study suffers from the problem that in interview‐based research the participants are necessarily a self‐selecting group. Notwithstanding this point, the evidence suggests that the views of managers in a nation with a small, but highly developed, stock market are in line with those in countries with much larger exchanges. Further research could usefully extend the analysis and establish whether similar views exist in other countries with relatively small stock markets, but where the exchange is in an “emerging” rather than “developed” state.Originality/valueThe contribution of the paper comes from the uniqueness of the Irish setting: the Irish market is relatively small but, unlike many similarly sized markets, it is highly‐developed, with long‐term historical links to the London Stock Exchange. The results, therefore, provide evidence about the extent to which earlier findings based on the world's largest developed markets also prevail in those that are more modestly sized.

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Section: Resultsmentioning

confidence: 99%

Evidence on Irish financial directors' views about dividends

McCluskey

Burton²,

Power³

2007

Qualitative Research in Accounting &Amp; Management

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“…Although Brennan (1970) demonstrates that this analysis confuses investment policy and dividend policy, Long (1978) provides empirical evidence that investors may indeed prefer cash dividends. One argument which may help to explain an investor preference for cash dividends is Keane's (1974) suggestion that the payment of dividends helps resolve uncer-tainty about the firm's investments. More information must be disclosed when funds are obtained externally than when they are obtained internally.…”

Section: Valuation Issuesmentioning

confidence: 99%

Variables Influencing Dividend Policy In Australia: Survey Results

Partington¹

1989

Business Fin & Account

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“…Second, managers may disclose information about their policy for financing investments to the market through dividend decisions (Keane, 1974(Keane, , 1985; according to this view, a high dividend payout policy is associated with new equity/debt financing while a low dividend payout policy is associated with the financing of capital expenditure through retained earnings (Fazzari et al, 1988;Lonie et al, 1990;Garver and Garver, 1993). Investors may prefer the former combination because a large quantity of information is usually disclosed about the proposed investment in the share prospectus; uncertainty is reduced in comparision to the situation where most of the information about the investment remains undisclosed.…”

Section: Introductionmentioning

confidence: 99%

Anomalous evidence in dividend announcement effect

Gunasekarage

Power

2006

Managerial Finance

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Purpose -This paper seeks to examine the long-run financial and return performance of UK companies which are grouped according to whether or not they have changed their dividends and earnings. Prior research has been conducted using US data and they are limited to extreme dividend changes such as dividend initiations and omissions. They have also arrived at contradicting results; some report a drift in performance, while others document evidence of mean reversion in performance. The current paper hopes to resolve this conflict using data for a large sample of UK firms which disclosed more general changes in dividends and earnings. Design/methodology/approach -The aims of the paper are addressed using a stock marketbased study of share price performance and a detailed analysis of company performance based on financial ratios. These analyses are conducted from five years before to five years after the announcement of dividend/earnings news. Findings -At the time of the announcements, share returns tend to be positive (negative) where companies have increased (decreased) the dividend and earnings. There is also evidence to suggest that the stock market has anticipated some of this news in the preceding 12 months. However, the dividend/ earnings news does not appear to act as a signal of long-term future company performance; companies which cut this dividend and reported lower earnings achieved the largest excess returns over the next five years. A similar mean-revealing pattern existed in the financial ratios. Finally, most of the future long-term share performance was attributable to the earnings rather than to the dividend news.Research limitations/implications -The main implication of this research is that current dividend/ earnings news is not a good guide to future company performance. Indeed, it is these firms which cut their dividends along with reporting a reduction of earnings which achieve excellent results over a subsequent five-year period. Of course, there are a number of limitations with the research; it draws on data from two previous studies, looks only at the UK and does not consider sophisticated models of investors' expectations with regard to dividend and earnings information. Originality/value -The main contribution of this paper is the long-run analysis of UK company performance following joint dividend-earnings announcements. The analysis is comprehensive in that it considers both stock market performance as well as financial ratio performance for a period of up to five years following the dividend-earnings news. Thus, it should be of interest to most UK investors as well as to financial managers with large quoted firms. Academics will also be interested in the results since they shed some light on an existing debate in the literature.

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Dividends and the Resolution of Uncertainty

Cited by 6 publications

References 2 publications

Evidence on Irish financial directors' views about dividends

Evidence on Irish financial directors' views about dividends

Variables Influencing Dividend Policy In Australia: Survey Results

Anomalous evidence in dividend announcement effect

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